The Fair Tax: It's Back
Rick Perry is getting a lot of scrutiny for comments in his book Fed Up! where he argues that making income tax constitutional through the Sixteenth Amendment has lead America on a "road to serfdom". He writes that the income tax could be replaced by a Fair Tax:
Another option would be to repeal the Sixteenth Amendment to the Constitution (providing the power for the income tax) altogether, and then pursue an alternative model of taxation such as a national sales tax or the Fair Tax. The time has come to stop talking about fixing the broken and burdensome tax code and to take bold action to replace it with one that is not a burden for the taxpayer and that provides only the modest revenue needed to perform the basic constitutional functions of the federal government.
Fair Tax advocates a call for a 23 percent tax to be imposed on all goods, but only at the point of purchase by the consumer. (In reality, the actual tax rate would be higher then 23 percent, and be closer to 30 percent.) This is different (and less well designed) from a value added tax where a product is taxed at every stage of manufacturing or distribution.
The economic merits of the Fair Tax have been demolished in so many ways that it is not worth rehashing the arguments in full, but you can read FrumForum's own series on the Fair Tax here. Bruce Bartlett has also testified to Congress about the many follies with the plan.
The bullet point list of problems with the tax:
-It is incredibly regressive. Lower and moderate income individuals have more of their income going into consumption.
-It brings in very little revenue (one Brookings paper estimated a loss of $7 trillion in revenue over the course of a decade)
-In order to bring in a workable amount of revenue, the tax rate would need to be raised significantly above its promised 23 percent rate (a rate which has, surprisingly, remained unchanged for as long as Fair Tax advocates have been around, despite the growth in government.)
-It would require the creation of an extensive and large rebate system, which may undermine the very tax itself, as lower and moderate income families get squeezed by it and seek a way out.
So, given these faults with the tax, why does Rick Perry write about it and why might be campaign on it?
1. You get to say you will end the IRS. Since Fair Tax advocates call for the tax to replace every other tax Americans face, you would no longer need an IRS to administer it.
2. It ties into Perry's Federalism. Perry has written extensively about his distrust of national government and the Fair Tax plays to that. Its advocates emphasize that the tax can be administered by existing state authorities, so you also get to throw in a line about how the Fair Tax is compatible with the 10th Amendment.
3. It worked for Huckabee. Mike Huckabee of course won the Iowa caucuses in 2008 in a win largely credited to evangelical preference to him over Mitt Romney. Yet he did unveil his support for the Fair Tax in a 2007 GOP debate that was held in Iowa.
4. Mitt Romney won't say it. While Romney is willing to tout the conservative conventional wisdom, even if it is not accurate, he can't come out and support a Fair Tax. Even the business elites at the Wall Street Journal are not huge fans of the policy.
Since the Wall Street Journal is not entirely sold on Perry's electability, and according to Politico, GOP elites regard Perry as a "dope" anyway, there may be no love lost if he embraces the policy.
